You don’t want to even think about it, but it is important to know in advance the impact that the passing of one spouse can have on the finances of the surviving spouse, especially if both are already retired.
You may have been diligent and prepared an estate plan (will or a living trust), but have you “run the financial numbers” to see if a surviving spouse will be able to live comfortably when one spouse passes away? It’s devastating enough when you lose your soul mate, but that misery can be compounded not only by the loss of several sources of income, but also from ongoing large expenses.
Knowing ahead of time that a surviving spouse will have enough income and savings to live comfortably gives both of you peace of mind. And even if the “numbers” indicate a tight budget for the surviving spouse, there is still time to begin making lifestyle adjustments, delaying retirement or increasing savings.
Income falls but expenses continue
When a spouse passes, especially if both are retired, the greatest financial risk to the surviving spouse is the loss of income at a time when expenses are ongoing. Below are a few pitfalls to plan for:
Social Security
The social security administration estimates that social security comprises more than 90% of the total income for about a third of recipients. Unfortunately, when one spouse passes away, that spouse’s social security income will cease. The loss of a significant chunk of a retired couple’s income could cripple the surviving spouse’s cash flow. While the surviving spouse may receive an increase in their own social security due to a survivor’s benefit, this increase will not make up for the loss of the deceased spouse’s SS income.
Pensions
If a retiree was lucky enough to have a defined benefit pension plan (those plans began converting to defined contribution plans like a 401(k) plan in the late 1970s), a surviving spouse’s claim to that income depends on how the pension was originally set up. Some payments stop entirely while others pay only a percentage of what the deceased spouse was receiving. For retirees who already had limited retirement funds, the loss of all or a portion of a monthly pension, together with the loss of social security, can create severe cash flow problems.
Income taxes
If a spouse dies, the surviving spouse will file as a single taxpayer when filing a tax return the following year. This change can have significant financial effects, including a decrease in the amount of deductions that can be claimed.
Monthly expenses
The impact of lower monthly social security and pension income is compounded when the surviving spouse realizes that many large expenses remain ongoing. In fact, most retirees are surprised at just how much of their monthly expenses are fixed. While expenditures for things like food, travel and transportation may decline, items like a mortgage, property taxes, utility bills, yard maintenance and streaming TV/cable will likely remain the same. Lower income and continuing high expenses could have a devastating financial impact on the surviving spouse.
Relax, our app can “run the numbers” for FREE
Don’t stick your head in the sand trying to ignore this potential issue and don’t fret over how to “run the numbers.” Our free app, the Relax Retirement Planner, can model for virtually any of life’s contingencies, including the passing of a spouse and the calculation of social security survivor benefits. In fact, it is a fully featured retirement planner that provides an accurate and clear picture of your financial future under virtually any scenario.